Global Trader - from a success story to one which is maybe not quite so...

Global Trader [which is a subsidiary of JSE-listed Purple Capital (JSE:PPE)] voluntarily placed its London-based European unit (Global Trader Europe), which includes its Thailand business and an associated office in Toronto, under administration on Feb 15 2008 after one of its clients incurred trading losses that he wasn't able to cover, causing a shortfall of regulatory minimum capital at the unit as required by the UK Financial Services Authority which in turn forced Global Trader Europe to close its doors to new business.

Global Trader pioneered spread trading and contracts for difference (CFDs) in South Africa and is reportedly big there. Purple Capital Ltd., a South African investment company, bought Global Trader for €36m (£28m) in November 2007.

Charles Savage CEO of Global Trader stated that the group's total earnings will be affected less than 20% by placing Global Trader Europe into administration. Charles stresses that Global Trader is a separate business entity to Global Trader South Africa (http://www.gt247.co.za/), which in turn is ring-fenced from Purple.

Robert Bonnier

Global Trader insists that local clients in South Africa have nothing to worry about and that the business is 'highly profitable'. In fact, Charles Savage, CEO of Global Trader has been quoted of saying that the group's total earnings will be affected less than 20% by placing Global Trader Europe into administration. But some UK clients ask if Global Trader South Africa is so robust, why it or Purple Capital didn't step in to cover the capital deficit at GTE. Charles simply said that the size of the deficit was just too big for Purple's balance sheet.

UK clients also complain that communication from GTE and the administrators, Smith and Williamson, has been poor. Meanwhile, the Financial Times of London reports that GTE's administrators are moving to recover assets of the troubled client. It reported Tuesday that an exclusive £16m residency on one of London's most sought-after streets is set to come under the control of GTE's administrators.

The defaulting client is rumoured to be Cold Investments, a company owned by colourful businessman Robert Bonnier (a guy who has apparently been fined for market abuse by the FSA in 2004!). What is known is that the client incurred losses by betting on two technology shares; Artilium and SCI Entertainment Group and is allegew to owe failed broker Global Trader Europe more than £6m

So what really happened here?

I would guess that the trouble was that, by London standards, Global Trader Europe was a very small fish (less than 200 funded accounts), and hence more vulnerable to the vagaries of a major client - and according to the Financial Times, it was only one client. In fact, unlike Global Trader's South African operation which was largely a retail operation with 3000 clients and the biggest client contributing to less than 3% of their revenue, Global Trader Europe catered to a small number of high-net-wealth individuals and small- to medium-sized hedge funds.

I think the marketing people in the UK branch of Global Trader gave the impression of having the financial strength of their South African parent, Purple Capital, but when it came to it Purple Capital were not willing to pick up the tab. I even test drove their CFD platform at one point - nearly opened an account but being an old ludite I just decided to stick with shares/spread betting as I've always done - phew.

Although one does wonder just how much security was held to back these margin operations, and why the CFD position in default was not closed out by the firm well before it became life threatening. Charles, the chief executive of Global Trader stated that once it was clear that the client was not able to meet the margin call they had to rely on the stock price and liquidity which turned against them to the extent that they weren't able to exit the positions.

If I were Purple CEO Mark Barnes, I would be asking some tough questions of Global Trader Europe's back office and risk management practices, especially as the losses were concentrated in such a second-line stock as Artilium, an AIM-listed telecoms technology group (where did we hear about that sort of thing before?) whose share price has fallen 86% from its October peak.

How could the Global Trader management have accepted the risk profile of Robert Bonnier?

Why has Global Trader accepted more positions when they could feel that their regulatory capital was in danger and/or negative?

Why was one client been allowed to build so big a stake in two AIM listed companies? [most spread betting providers will not allow clients to control over 10% of a company to reduce the risk of a single client having a noticeable effect on the share price]

The Aftermath

The fallout from the collapse of City broker Global Trader Europe (GTE) had a ripple effect on some other companies, one casualty being Gibraltar spread-betting firm FuturesBetting (now trading as ProSpreads) which was forced to cease trading to protect client monies.

March 2008 - 'It is with regret that FuturesBetting.com has had to take this action; however it is the priority and responsibility of the firm, as a regulated entity, to protect client funds. The reason for the decision to require all clients to close their positions is because the Company can no longer meet its capital adequacy requirements. Unfortunately FuturesBetting.com has been caught up in the financial crisis of Global Trader Europe and a significant proportion of the company's resources have been 'frozen' along with that of all of Global Trader Europe's other clients.'

I'm of the opinion that FuturesBetting will try to re-group and start again as Futures Betting was a very organized company and all they need is an angel investor. A FuturesBetting.com client commented:

'I also know for fact that there was no problem with any client and margin issue. Their risk management is very tight and I have many times tried to get into new positions and have been rejected by the risk system because of lack of money in my account' 'I called them as soon as I got the email from them and they were very sorry and sad about the situation. They are doing everything by the book and want to keep the good reputation in case they re-group.'

--- October 2008 Breaking News --- Futures Betting has been acquired by London Capital Group Holdings (which also operates Capital Spreads and are a listed company on the London Stock Exchange) in May 2008 and has now re-launched trading as ProSpreads. So ProSpreads is now again open for business. Futures Betting provides experienced traders with a professional trading platform that offers fast and reliable financial spread betting execution on major indices, currencies and commodities.

Malaysian Stocks

The fall from grace of UK-registered financial institution, Global Trader Europe Ltd, has had a far-reaching impact on certain Malaysian stocks and sparked off investigations of possible manipulation of these counters, sources said. It is understood that at least nine companies on Bursa Malaysia have been adversely impacted by 'forced selling' of stocks that are pledged to Global Trader in return for a leveraged line of credit. The heavy selldown of these stocks is said to have caused the authorities to start investigation on possible manipulation. Towards this end, several brokers have been quizzed by the authorities.

'It is not known how many more companies have shares pledged with Global Trader, which had been actively dishing out lines of credit to Malaysian investors last year,' said a source. Shareholders of the affected companies are said to have pledged their shares to Global Trader's office in Bangkok. Following the liquidity crunch faced by its parent company in the UK, the administrators scrutinised the accounts of its clients, especially in its Bangkok branch. It sold the pledged shares and other assets of accounts that had a margin shortfall.

This in turn triggered a massive forced selling of the stocks that were pledged. Companies affected are said to have included:

The most noticeable casualty is H-Displays, a Mesdaq-listed company which saw some RM270 million of its market capitalisation wiped out in three days. Last Monday, the stock was trading at RM1.57 and had a market capitalisation of RM329.7 million. Last Friday, it closed at 29 sen, with a market capitalisation of RM60.9 million. A check on H-Displays' annual report shows that Hitech Ventures Pte Ltd, the controlling shareholder of H-Displays with some 51.2% equity, had pledged about 13 million of its 107.6 million shares.

It is understood that Merrill Lynch, which had been hired to assist Global Trader in its asset recovery process, had been involved with the sell order. My EG Services meanwhile, tumbled some 22% over the past two weeks, shedding close to RM67 million in market capitalisation. Yet another Mesdaq-listed company, Ygl Convergence lost 69% in market capitalisation through last week, after its price fell from 57 sen on Monday down to 17.5 sen last Friday.